DBRS Assigns First-Time BBB (low) Issuer Rating to Elis S.A.

DBRS Ratings Limited (DBRS) assigned an Issuer Rating of BBB (low) with a Stable trend to France-based Elis S.A. (Elis or the Company). The rating reflects Elis’s industry-leading position, strong brand name recognition in the primary markets it serves, and its efficient and large-scale operations. Elis’s diversification in terms of its customer base and end-markets as well as the long-term nature of the contracts and high renewal rates lead to strong revenue visibility and support the expectation that the Company will generate surplus cash flows to deleverage. However, the rating is also driven by the Company’s exposure to markets which have limited organic growth prospects, the high capital intensity of its business model and the integration risks posed by its acquisition strategy, which could all potentially limit earnings and cash flow growth and therefore deleveraging.

Elis benefits from its industry-leading position and strong brand name recognition in the flat linen, workwear, hygiene and well-being service markets. As such, the Company has developed efficient operations with solid economies of scale, creating strong pricing power. The Company benefits from a very dense network in its French core market, which supports efficient operations and deliveries to customers and, following acquisitions over the past few years, it has replicated its French model in other countries. Beyond its primary markets, Elis has been actively growing its footprint in Europe and Latin America through both organic growth and acquisitions. Thus, the Company has been very active on the acquisition front, with several smaller bolt-on acquisitions as well as larger ones, such as Berendsen in September 2017, which was transformative for Elis, adding about EUR 1.3 billion in annual revenues. Elis has a track record of successfully integrating acquisitions, as evidenced by the Berendsen integration, which is well underway, and is expected to deliver about EUR 80 million in annual cost and capital expenditure synergies. Elis’s acquisition strategy does not currently impact the rating, however, if it were to undertake heavily debt funded acquisitions and/or be less successful integrating such acquisitions this could negatively impact the rating. In 2014 and 2017, Elis acquired two companies in Brazil and now has a significant presence in that country. Latin America, comprising Brazil, Chile and Colombia, represented about 8% of 2018 full-year revenues. In addition, the Company has shown resiliency through market downturns and was able to maintain stable margins during the 2008–2009 crisis, which have remained consistently above 30% on an EBITDA basis since 2001. Elis’s revenue visibility and margins consistency are supported by its long-term contracts (four years on average), close to 400,000 customers with very limited concentration, high customer retention rates and variable cost structure. The Company is fairly diversified by the type of services it offers and customers it serves, insulating it from cyclicality or volatility in any one particular sector. The Company also benefits from the fact that it provides an essential service to its customers, which often represents a relatively small portion of their costs base, allowing Elis to pass on increased costs. Also, many of Elis’s 400,000 customers are small and do not have strong price negotiating power, a positive for the Company.

The rating also takes into consideration the limited organic growth prospects in mature markets such as Western Europe, particularly France, its largest single market. However, the Company’s acquisition strategy has mitigated its reliance on the French market which currently contributes about one-third of the Company’s revenue, down from about 70% in 2014. Furthermore, the flat linen business line, due to replacement requirements, demands high maintenance capital expenditures, which, while variable to a certain extent, can potentially limit cash available for debt repayment in a market slowdown. Elis is also executing on a large number of acquisitions every year, which consume cash that can potentially limit deleveraging opportunities while also posing a potential integration risk. Although capital expenditures are currently high (about 21% of revenues) mostly due to rationalisation and turn-around initiatives in the United Kingdom, DBRS expects that they will decrease to below 19% of revenues by 2020, potentially bolstering free cash flow generation and deleveraging.

The rating is also supported by DBRS’s expectation that the Company will deleverage, which would translate into DBRS-adjusted debt-to-EBITDA trending toward 3.5 times in 2019/2020 and DBRS-adjusted cash-flow-to-debt trending toward 25% over the same period, strengthening its financial risk profile commensurate with a low investment-grade rating. The strong business risk profile, expectation of free cash flow surpluses and the recent efforts and commitment from management to reduce leverage by actively repaying debt and shifting toward a more conservative financial policy give DBRS comfort that these credit metrics are tenable on a sustainable basis going forward. However, a return to more aggressive financial policies, debt funding of large acquisitions or slowdown in earnings growth leading to smaller-than-anticipated free cash flow generation could also lead DBRS to take a negative rating action. While unlikely in the near term, the rating could be upgraded if the Company significantly improved its operating performance and its financial metrics on a sustainable basis.

Notes:
All figures are in euros unless otherwise noted.

The principal applicable methodology is the “Rating Companies in the Services Industry” methodology (February 2019). Other applicable methodologies include “DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries” (November 2018). These can be found can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include Elis’s financial reports, company presentations and meetings and discussions with Elis’s management. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS rating on this company.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve-month period. DBRS’s outlooks and ratings are under regular surveillance.

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Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Valentino Teobaldo Daprile, Senior Vice President
Rating Committee Chair: Charles Halam-Andres, Managing Director
Initial Rating Date: 28 March 2019
Last Rating Date: Not applicable as no last rating date.

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